Mike Larson, a real estate expert, recently took some tough questions about the current state of the housing market. The key takeaway from the series of questions is that you cannot believe everything that you hear about in the media. The housing market is a complicated system, but there are signs it could be on the mend. Below are some of the questions that were asked of Mike and his response:
Q. Don’t you know that millions of foreclosures are hitting the market? How the heck can you have a recovery when that’s the case?
A. Do I know that? Of course I do! I’d be a pretty lousy analyst if I didn’t. But you know what? Many of those properties are being ABSORBED. They’re being priced aggressively, and they’re being snapped up quickly. Some are ending up in the hands of investors. But many are going to traditional buyers who can actually afford to buy homes again thanks to the collapse in prices.
Here’s something else that isn’t being talked about much:
While late-stage delinquencies (90+ days) and loans in some stage of foreclosure have piled up like crazy, there is some evidence of stabilization in early-stage delinquencies. That’s not just in mortgages, by the way, but also things like credit cards.
So yes, we’re dealing with a mountain of distressed inventory. But it’s not getting bigger, and leading indicators suggest we’ll see improvement before long.
Q. Banks aren’t making loans any more. Nobody can get a mortgage!
A. This is another media canard. Yes, standards are much tighter than they were a few years ago. That’s a good thing. But the tightening trend has long since stopped getting worse. If anything, conditions are starting to gradually ease again.
Case in point: The Fed’s Senior Loan Officer Survey on Bank Lending Practices. This quarterly survey chronicles how willing banks are to make various types of loans, including home mortgages.
In the worst depths of the housing crisis (Q3 2008), a net 74 percent of the institutions surveyed were tightening standards on traditional home mortgages. It truly was almost impossible to get a mortgage.
Lending standards are starting to loosen.
But that number has shrunk steadily since then — to just 13.2 percent in the first quarter of this year, according to Fed data. That’s the best reading going all the way back to the end of 2006! I’m also seeing a bit of easing in jumbo loan qualifying standards. Even the mortgage securitization market is starting to stir again after lying dormant for many, many months.
Q. What about “shadow inventory?”
Aren’t banks sitting on a mountain of unsold homes? When they dump that junk on the market, it’ll crater everything!
A. Yes, shadow inventory is out there. Banks, Fannie Mae and Freddie Mac, and other parties do have a lot of property that they own outright. Other homes are still nominally owned by borrowers. But those borrowers are way behind on payments. By all rights, these properties should be quickly seized, then sold to new buyers. And if that happened, then prices would crater.
But that just ain’t going to happen! The government has made it entirely clear that they will NOT force those parties to liquidate.
Banking regulators are going to let some of the inventory fester while they look the other way. Policymakers are also going to continually add more goodies to keep lenders from foreclosing … and add more sweeteners to lower borrower payments via the loan modification process.
Heck, some homes are being foreclosed, then rented back to troubled borrowers!
So yes, there could be a few million “shadow” homes to deal with. But they’ll be dealt with over time — parceled out into the market rather than dumped all at once. This will keep the recovery from being a vigorous one, but will also avoid a fresh sizable NEW crash in home prices.
Q. You’re on record predicting a surge in interest rates. Won’t that pummel housing?
A. Later on, higher rates will cause problems for housing. But not right now. Mitigating factors should offset the impact of higher rates during the first phase of the rate climb.
Remember, rates are rising in conjunction with an improvement in the global and domestic economies. Job losses are easing and consumer confidence is improving somewhat. Those forces will likely compensate for higher financing costs — until rates rise fast enough and far enough to overpower them.
Think I’m nuts?
Then consider this: Thirty-year fixed mortgage rates surged 33 percent from 6.49 percent in October 1998 to 8.64 percent in May 2000. During that same time, home sales plunged, right? Wrong! Existing single-family home sales held steady at around 4.57 million units. New home sales dipped a barely noticeable 4 percent.
Bottom line: When rates rise far enough and fast enough to win the battle with improving economic conditions, THEN you want to worry. But not until then. Until then, focus on what I keep harping on — the FIRST-ROUND impact of rising rates, such as plunging bond prices and how to profit from them.
Oh and in case you’re wondering, within a day of the first contract on my house falling through, I had multiple new showings. A replacements contract was signed less than a week later.